Regulatory Monitoring, Closure Costs and Bank Moral Hazard Behavior

Sumon C Mazumdar

Journal of Regulatory Economics, 1997, vol. 12, issue 3, 267-89

Abstract: We theoretically analyze the efficacy of close regulatory monitoring and early bank closure policies, introduced by the 1991 Federal Deposit Insurance Corporation Improvement Act (FDICIA), in reducing the FDIC's losses and curbing bank moral hazard behavior induced by mis-priced deposit insurance. Contrary to conventional wisdom we demonstrate that continuous bank monitoring and early closure may in fact exacerbate the moral hazard problem if bank shareholders face a penalty upon closure. Moreover, if reputational disincentives and monitoring costs prevent the regulator from implementing timely closure then the bank's moral hazard incentives are significantly altered. These results suggest several new policy implications. Copyright 1997 by Kluwer Academic Publishers

Date: 1997
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://journals.kluweronline.com/issn/0922-680X/contents link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:regeco:v:12:y:1997:i:3:p:267-89

Ordering information: This journal article can be ordered from
http://www.springer. ... on/journal/11149/PS2

Access Statistics for this article

Journal of Regulatory Economics is currently edited by Menaham Spiegel

More articles in Journal of Regulatory Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().